Income growth, income uncertainty, and urban–rural household savings rate in China

Abstract

Chinese urban and rural household savings rates each demonstrated prominent changes over the course of 1995–2007. Specifically, the average urban household savings rate witnessed a boom, while its rural counterpart experienced the dramatic opposite. The evolving income shocks and income levels are promising candidates to account for the patterns observed in empirical data. I then consider a buffer-stock life-cycle savings model that is separately adapted to the two segments of households. By disciplining the model with realistic income parameters, and allowing the model to track changes in income shocks and income growth rate over time, the factors concerned can produce nearly half of the increase in urban household savings rate, and more than two-thirds of the decrease in rural household savings rate. I attribute the increase in urban savings rate to agents’ precautionary reactions to the intensified income shocks and the reduced pension replacement ratio. Rural household savings rate, on the other hand, appears to be depressed by the lower permanent shocks to income.